What Are The Different Types Of Software Development Contracts?

Nisha Gopinath Menon -
19 September 2017

Often, people tend to water down the message in the contract to translate to how money exchanges hands, when in reality it will dictate a lot more than this. The contract will drive the behavior of engagement, timelines, and more. No matter the engagement model you choose to go with, ensuring the project meets expectations and stays on track becomes a shared goal for both of you. Even so, make sure you adopt the right contract to pave for a smoother engagement process.

When contracting custom web application development, there are mainly two different types of contracts to choose from. An experienced developer understands that every project comes with exceptions of its own and is flexible enough to attempt to match the specific nature of your project with the contract. Below is listed down a list of pros and cons both the contracts entail to help you find your right fit.

1. Time and Materials Contracts

This one here is a classic. Simply put, you pay for the number of hours the software developer works on your project.

Pros:

It’s a far less complicated model and hence the easiest way to get started. In fact, you don’t have to walk in with detailed specifications to start your project.

T&M contracts give you a lot of flexibility. Within the same budget, you can change priorities of specific features and add new ones.

In this model, you know exactly what you’re paying for, and this drives a lot more trust and communication.

There are more chances of you achieving the result you envisioned since there’s been constant communication throughout the engagement.

The supervision involved in this model allows you to check how much has been done on your project regularly.

Cons:

You have less control of the budget. Once the high priority items are taken care of initially, it might so happen that a few requirements are harder to implement. Here, you might not be able to stretch your budget more won’t be able to purchase any more hours from the provider.

Deadlines could shift as the requirements are updated, so it’s harder to foresee when exactly the product will be ready.

Honestly, in most cases it’s quite difficult to predict the final budget since the budget fixed initially will change noticeably depending on the client’s changing requirements during the development process.

This approach requires the constant involvement of the client, requiring more time and effort from both ends.

What Are The Different Types Of Software Development Contracts

The Time And Materials contract model has stood the test of time because it represents the uncertainty in which most projects, especially startups are developed. You see the initial scope of work seldom stays unaltered in the course of the project. Here changing the scope doesn’t just mean adding a few extra features, but also quite often removing ones that don’t seem necessary anymore. End of the day Time And Materials model gives the client and provider the needed flexibility to focus on the final result, a market-ready product.

2. Fixed Bid

In this model, you define exactly what you envision, and the software developer agrees on what should be built, and he puts a fixed price on it, and in a simple world, all goes as planned. This is a preferred model for longer periods of engagement.

Pros

*You get what is defined in the contract for a fixed price. This can be reassuring and could make it easier to get your budget approved.

Here, a lot of the risk is at the provider’s end because if the project goes over budget, then it’s the provider’s headache. So the client has peace of mind of knowing the project will remain on budget.

In this contract, strict deadlines are enforced, and your development team is highly motivated to meet them.

Everything has been planned out going in, so you always know the status of your project.

No need for you to supervise since all project details are mentioned in the contract.

Cons

The provider might finish the requirements in the contract at a lower cost than the estimate. Here, you have not got all the hours out of the provider you might’ve liked.

You cannot change the requirements of the project as easily. In fact, you might not even have the visibility into the development process to know when the requirement should be dropped.

If design process isn’t clearly laid out or the communication process isn't healthy, this contract type is not a good idea especially with the developer assuming all the risk. Worst case, the developer might resort to shortcuts to stay within budget resulting in a bad quality.

This contract is the most drawn out way to get your project started, requiring a lot of work up front.

The bottom line is, in a fixed bid contract, you’re paying for an outcome, whereas in T&M model you’re paying for someone’s time. Here you will probably end up overpaying, and the lack of flexibility is another significant issue.

Conclusion

There is no clear-cut, one-fits-all choice here. Some clients are inclined towards a ‘Fixed Bid’ while others gravitate towards the ‘Time & Materials’ model. Now if you look at the realities of a software development process you will see that the ‘Time & Materials’ approach takes care of the uncertainties of the process in the best way. Software building happens to be a dynamic process where software requirements are bound to change. It is impossible to foresee all the requirements, for any complex software project.

Fixed bid estimates have their own advantages and will remain an important part of the software industry for a long time, but educate yourself about the risks involved in these types of agreements. In a Fixed Bid agreement, it can get difficult to keep the important things prioritized since everything has to be taken care of within the fixed budget. On the other hand, a project run under ‘Time and Materials’ is built on a model that prioritize the most important items first with each iteration.

End of the day, it is important to understand the implications of a contract on a behavioral motivation too, beyond the payment terms. It is not a good idea to shift responsibility to anyone side entirely. Working as a team is the right way to build a beautiful product.

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